China’s Property Tax – Once More With Feeling

China has once again been threatening real estate speculators with the big stick of a property tax. But the property market doesn’t seem to be overly concerned – and with good reason.

While the central government clearly wants to keep property prices from skyrocketing, there is little appetite for tough measures, particularly at the local level. Revenues from land and property sales are just too important to local government budgets.

Stephen Voss for The Wall Street Journal

In May, Beijing announced a list of priority policies for this year – and on that list was progress with a real estate tax on property values to be paid annually. Last week the official Xinhua news agency and the China Securities Journal reported that several cities had already drafted plans for the tax in several cities. According to the newspaper, Qingdao, Nanjing, Shenzhen, Hangzhou and Beijing all had submitted reports on plans to implement the tax.

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But asked about the report, an official at Beijing’s finance department denied there had been any such move. “How can we submit a report when we haven’t even seen any official government request?” the official said before hurriedly hanging up the phone.

Shortly afterwards, the municipal government department posted a statement on Sina Corp.’s popular Twitter-like Weibo microblogging service saying: “There hasn’t been any report submitted on a property tax and there has been no request for one from higher authorities.”

According to the China Business News, Shenzhen officials were unwilling to state categorically they had taken the bold step of actually submitting a plan, though the newspaper quoted sources as saying this had been done (in Chinese).

China has plenty of real estate taxes but all are based on transactions. Economists have called for a tax on the privilege of holding property, arguing it is an effective way of discouraging speculative purchases.

So far only Shanghai and Chongqing have implemented the tax on a trial basis – a trial that has been in progress since 2011.

Even these so-called trials have been extremely timid policy gestures. Chongqing has set a tax of 0.5 % to 1.2% of property value while Shanghai has 0.4% to 0.6%. Chongqing has applied its tax to villas and other high value properties. Moreover, there is supposed to be a comparison to prices in the surrounding area. (The tax on such high-end homes is only levied on those that cost more than two times the average in the area, which can leave a fair amount of wiggle room)

And in Shanghai’s case, just to ensure the policy does minimal damage – the tax is used on second homes of residents and first homes of non-residents. To make the tax is even less painful, it is imposed only on bigger homes with more than 60 square meters per person living there. (That might convince some people to ask an adult son or daughter to stick around or maybe just invite a few friends over for a longish stay).

Property market control measures, such as curbs on home purchases and credits for developers, have kept home prices from galloping further out of reach of the comrade-in-the street. But prices have been stubbornly moving higher of late. In May, 69 of the 70 cities across the country posted a year-over-year increase in prices, with only little Wenzhou showing a drop.

With economic growth slowing – 7.7% year-on-year in the first quarter, following a 7.9% final quarter last year – chances are that the government won’t push too hard on this key economic driver.

Beijing may already feel like it has become the central government’s sacrificial lamb. The capital is so far the only city to actually implement a May directive to tax transaction profits at 20%. It also has been reining in the practice of calling some of the sales price a “renovation fee” – a sleight of hand that reduces tax.

“Excessively high expectations for the tax may lead to big disappointments,” said Yang Zhiyong, a researcher at the Chinese Academy of Social Sciences, a top government think tank. “We really need to move cautiously on this as it affects so many people.”

Authorities may find they need to repeat their property tax threat. Only this time with feeling, please…

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